Investing in Clean Energy in Africa: Tom George of Persistent Energy Partners, Part I

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As a follow up to our E+Co Case Study event with Bruce Usher in April, we were exited to speak with Tom George of Persistent Energy Partners (PEP), a clean-energy focused impact investor in sub-Saharan Africa and E+Co’s successor organization following its restructuring. In Part I of our interview, Tom speaks about PEP’s history as a successor to E+Co, PEP’s strategy in working in the sub-Saharan African market, and challenges faced by African energy entrepreneurs.

Inspiring Capital: What does Persistent Energy Partners do? How did it come about? What are the differences between Persistent Energy Partners and its predecessor organization, E+Co?

Tom George: Persistent Energy Partners (PEP) invests in, incubates and advises businesses that provide clean energy to off-grid consumers in sub-Saharan Africa. PEP was founded in connection with the restructuring of E+Co, which between its inception in 1994 and restructuring in 2012 built a $30 million portfolio of investments in small clean energy companies in emerging markets. It funded its portfolio-building with loans from development finance institutions (e.g. the IFC). By 2012 it was managing over 150 investments in 20 countries on three continents. E+Co was restructured because by 2012 it couldn’t both cover its operating costs and service its debt without a significant amount of grant funding. This failure was due in part to the fact that E+Co’s portfolio was severely underperforming and in part to problems inherent to its approach: the operating costs of capably managing its many small, dispersed investments far outstripped the revenue-generating potential of the portfolio. In 2012, its creditors agreed to a restructuring under which E+Co's assets would be spun off into private equity funds that would be managed by a newly-created fund manager, PEP.

Structurally E+Co and PEP differ in two ways. First, E+Co was a nonprofit and PEP is not (we are a certified mission-driven B Corp). Second, E+Co borrowed money to make investments and owned those investments, whereas PEP is an investment manager. The funds it manages are owned by E+Co's former creditors, who pay PEP management fees to manage them. PEP is working to liquidate the holdings in the funds it manages for E+Co's former creditors while pursuing a new investment strategy in clean energy development with a residual fund of grant capital. I'll discuss our new investment thesis and the portfolio we’re building in more detail in my responses to the questions below.

IC: E+Co struggled to obtain accurate financial data from its investees, finding that entrepreneurs were often unwilling to provide concrete data. Are struggles with data collection inherent to impact investing in developing economies? How has PEP dealt with this issue, as well as with the fact that in sub-Saharan Africa there is no such thing as a credit score?

TG: Obtaining reliable financial data from our portfolio companies, which are primarily small and mid-sized African businesses, continues to be an issue for us and we believe is a broader issue in many emerging markets. We have dealt with this by adapting to market realities. Like African-based commercial lenders to small and mid-sized business, we manage our portfolios without the transparency that is common in the West. We accomplish this with a heavier reliance on collateral and closer monitoring (which sometimes means multiple weekly phone calls and regular visits to borrowers’ offices). We have also made a point of learning the sectors we invest in so that with top-line revenue numbers and other basic data, we can impute many other financial performance statistics of our portfolio companies. This isn’t as good as getting full GAAP financials every quarter, but we believe that it is a reasonable way to manage the risk for our investors.

IC: Another one of E+Co’s major challenges was a low repayment rate. Has PEP been successful in increasing the repayment rate among investees, and if so, how did you do it?

TG: PEP has been very successful in increasing the repayment rates on the portfolio we took over from E+Co. We have accomplished this largely by being persistent: spending lots of time both working very closely with the companies' management teams to understand their companies and their ability to service their existing debt, and simply engaging in collection efforts. We found that many previously-delinquent companies in E+Co’s portfolio were quite capable of paying, but naturally had other uses for their capital. Since E+Co wasn’t bothering them, they were inconsistent payers. We rationalized loans that didn’t fit borrowers by restructuring them to make the repayment terms fit more reasonably to the borrower. We have been assertive of our legal rights against borrowers who were both delinquent and uncooperative (we always work with cooperative borrowers). We have obtained judgments and seized assets in several African countries, which we believe has sent a message to our other portfolio companies that we expect them to honor the terms of their loans.

IC: A common issue in this space, and one that E+Co faced, is that it takes a lot of staff and time to gather data on investees, oversee investments, and provide assistance to investees. How does PEP deal with this issue now? Do you have plans for how to handle this when scaling up in the future?

TG: PEP’s core conclusion about why E+Co eventually failed was that the model of making many small investments in local entrepreneurs could never support the overheads (staff, offices, &c.) required to capably manage such a portfolio. So PEP has adopted a different model, one in which we (a) limit our sector focus to a “core competency” and (b) make a smaller number of investments in businesses that we can carefully manage and, in some cases, incubate. I’ll tell you about the type of businesses we focus on in my answer to the next question.

This new focus enables us to have a significantly smaller staff than E+Co had. We also focus our staff on the activities that are most critical to our business. We don't, for example, have any staff that are fully devoted to fundraising, marketing or impact measurement, each of which E+Co had teams for. Those are all important and valuable activities, and a larger PEP will certainly have staff to work on them, but at present our size dictates that we channel our limited person-hours into making the portfolio as valuable as possible.

IC: What are the biggest challenges faced by the entrepreneurs PEP works with?

TG: To answer this question I should first describe PEP's investment thesis and sector focus. PEP focuses its capital available for investment on developing distributed energy services companies (“DESCOs”) in Africa. DESCOs are very similar to solar leasing companies in the developed world, some of which you might be familiar with – companies like Elon Musk's Solar City (NASDAQ: SCTY) are by now achieving significant scale in the US. Solar leasing refers to a company installing a solar array on a home or business and leasing it to the owner of that home or business. The customer pays the solar leasing company, rather than its local electric utility, every month for the electricity from the panels. And any un-used energy gets sold to the grid via net metering. Solar leasing has saved many homes and businesses in the US money on their monthly electricity consumption, and has spurred the creation of a competitive, rapidly-growing industry.

PEP believes that solar leasing can achieve huge scale in Africa as well. Well over 100 million households (comprising over 500 million people) in sub-Saharan Africa lack access to electricity. To light their homes, most buy kerosene, which is damaging to both human and environmental health, and is also quite expensive on a per-lumen basis. These consumers want access to quality electricity and are willing to pay for it, but inefficient electricity grid extension programs in many sub-Saharan countries have failed to bring them service.

PEP thinks that solar leasing companies – or, as well call them, DESCOs – have the ability to grow rapidly in the near future and eventually serve this market. DESCOs can vary in terms of the technology they use and the consumer financing they offer (i.e. lease financing, leasing, or pay-per-use). To give you a concrete example, I’ll tell you a little about Persistent Energy Ghana (PEG), a company that PEP launched with the management team of Ghana-based Impact Energies. PEG targets rural and peri-urban Ghanaian villages, and either installs a solar array and micro grid in a village or individual solar home systems (SHS) on the homes of each customer that signs up. PEG owns the micro grids and SHSs it installs, and charges its customers a monthly fee based on the services they want to use (e.g. lighting, mobile phone charging, radio, TV, &c.).

Now, to answer your question: the DESCO sector worldwide is still very small – there are probably fewer than 20 companies operating in the sector globally. Because the companies in the sector are young (the first-mover, M-KOPA, launched only in 2011) and investments in the sector are very risky, some DESCOs have had trouble attracting capital. We at PEP were the first commercial investor to focus our attention on this sector, and I think that many more investors will do so in the coming years. Currently, only one DESCO has achieved profitability. To attract global commercial capital more DESCOs need to prove that this model can work.

IC: What is PEP’s biggest challenge as an impact investor in this space?

PEP wants its portfolio companies to grow quickly and tackle the huge market opportunity that we see in energy services in Africa. PEP’s biggest challenge is to continually figure out new ways to help them do that. Capital is one way we can help them – we have invested in four DESCOs to date and follow all of those operating in sub-Sahara. And we can provide value in other ways – we have financial, legal and technological expertise, proprietary research and market analysis, and experience partnering with growing businesses throughout Africa. But figuring out new and creative ways to keep growing our portfolio companies and this sector is our biggest challenge.